Question

In: Finance

Suppose the shares of Hector Financial are expected to pay a dividend of $10 next year....

Suppose the shares of Hector Financial are expected to pay a dividend of $10 next year. The annual growth rate is expected in the long term to be 2%. Investors require an 11% return on their investment in Hector Financial. What should be the price of this stock?

Select one:

a. $90.91

b. $92.73

c. $111.11

d. $113.33

Solutions

Expert Solution

Ans c. $111.11

P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
P0 = 10 / (11%- 2%)
P0 = 111.11

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